Could These Gold Producers Surprise You?

The drop in gold price in the past year has taken its toll on gold producers such as Barrick Gold (NYSE: ABX  ) and Goldcorp (NYSE: GG  ) . Both of these companies' shares have tumbled this year. Looking forward, however, these companies have several factors that could play in their favor. Let's start by reviewing recent developments.

In the second quarter, gold companies adjusted their long-term gold prices. Barrick reduced its long-term gold price on future projects to $1,300 per ounce. Goldcorp isn't any different, and it also revised its assumptions on the price of gold. This is why both companies saw heavy losses in the second quarter. They recorded high impairment of mining interests and goodwill provisions: Barrick's impairment provision was $8.7 billion; Goldcorp's impairment charges were $2.5 billion.

But not all gold producers have recorded these provisions: Yamana Gold (NYSE: AUY  ) didn't have these make impairment charges in its second quarterly report. According to the company's financial reports, Yamana believes the drop in gold prices would be partially offset by other inputs that would result in lower costs and updated mine plans. 

The recent developments in the gold market including the FOMC's decision to keep its asset purchase program unchanged and the strong demand for gold in Asia could keep the price of gold from resuming its downward trend in the near future. If gold prices remain stable, these companies won't have to record additional impairment charges to their mines, and their performance will play a bigger role in their valuation. Let's review some of the reasons why these companies may have cause for cautious optimism. 

Decline in costs
Barrick's all-in sustaining costs were lower than last year's by 13.3%. Moreover, the company's guidelines for 2013 are also lower than last year's, which could slightly ease the adverse effect caused by the sharp decline in the price of gold in the past year. One of the reasons for the drop in costs is the company's sale of less profitable mines. For example, the company recently sold three mines in Australia. 

Higher gold production
Both companies augmented their gold production, which is likely to result in higher revenues. Goldcorp's gold production grew by 11.6%. Most of the growth came from the Red Lake gold mines and Pueblo Viejo mine, which was opened last August and is one of the largest gold assets worldwide.

Barrick's gold production grew by 3.9% but is likely to rise even faster in the coming years on account of its Pascua-Lama project. Alas, due to the drop in gold prices, the company reduced its capital expenditure on this project by $0.7 billion-$0.8 billion in 2013 and by $0.8 billion-$1.0 billion in 2014. These cuts will impede the completion due date of this project. Nonetheless, these new projects are likely to pull up revenue in the near future. 

Valuation
These companies' valuations have tumbled in the past several months, mostly due to the drop in gold prices. The table below shows the enterprise value to EBITDA ratio, after controlling for the goodwill and impairment charges provisions that were recorded in the past quarters. I have controlled for these provisions to consider these companies' current operating profits.   

Source of Data: Google Finance, Wikinvest, and Damodaran

The table shows that Barrick's valuation is lower than the precious metals market average; Goldcorp's valuation is slightly higher than the market average but not far off. This makes Barrick the least expensive. In comparison, Yamana is close to the market average with a ratio of 7.37. 

Dividend
The sharp rise in operating loss has led Barrick to cut down its dividend to an annual payment of $0.2 per share, which means its yearly dividend yield is 1.03%. But not all miners have reduced their dividends: Goldcorp's dividend hasn't changed, and its yield is much higher at 2.34%. Yamana's annual yield is also similar to Goldcorp's at 2.63%. This may have been the silver lining of the staggering drop in these companies' stock prices – the rise in their dividend yields. It's also one of the advantages of owning gold companies over gold ETF such as the SPDR Gold ETF.    

Takeaway
The sharp drop in gold prices during the year has dragged down leading gold producers. Due to these changes, Barrick and Goldcorp have already adjusted their assumptions on gold prices. The projects these companies are developing are also likely to eventually pull up their revenues. Finally, their valuations are modest, making them attractive at current levels.

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Read/Post Comments (4) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 24, 2013, at 11:46 AM, techy46 wrote:

    It's pretty simple math, if gold miners produce gold for $1000 per ounce and sell it for $1200 per ounce they make 20% profits. The write offs fronm $1500 to $1300 affect book value but that not current cash flow just like depreciation. Gold price should stabilize around $1100-1200 due to demand and production costs after shorts have dumped their GLD holdings.

  • Report this Comment On October 25, 2013, at 2:46 PM, BrodyBorder wrote:

    Part of the discount for Barrick stems from risks associated with the Pascua-Lama project. I wouldn't merely assume that capital expenditures are the only obstacle. My understanding is that there are potential ownership disputes with two different countries and even viability questions.

  • Report this Comment On October 25, 2013, at 6:12 PM, fireman9119ca wrote:

    Fellas

    Here is an ETF that has a few of the CDN gold producers contained in it. I wanted to buy Barrick but no spine combined with me being somewhat of a moron..i settled on this

    Ticker xgd on the TSE

    http://ca.ishares.com/product_info/fund/holdings/XGD.htm

    beers soon,

    FM

  • Report this Comment On October 26, 2013, at 3:04 PM, skypilot2005 wrote:

    I like "Streamers" here.

    SAND, led by Nolan Watson, for exposure to gold.

    SLW , led by Randy Smallwood, for silver.

    Sky

    Long both companies

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